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Avnet's Biggest Ever Buyout of Premier Farnell Completed


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Avnet Inc. (AVT - Analyst Report) recently completed the much awaited acquisition of Premier Farnell plc in a total cash deal worth approximately £691 million. In US dollar terms, the deal is valued at approximately $845 million on the basis of yesterday’s $/£ exchange price, marking the company’s biggest ever acquisition deal.

Deal Benefits

U.K.-based Premier Farnell is engaged in the distribution of technology products and solutions, particularly engineering solutions to the electronic system design, maintenance and repair communities. With its business spread across Europe, North America and Asia Pacific regions, the company operates in about 36 countries.

The company believes that the acquisition will strengthen its worldwide digital footprint. As per William Amelio, interim Chief Executive Officer of Avnet, “By pairing our deep expertise in large volume broadline distribution with Premier Farnell’s specialization in proof of concept and design, we can offer true end-to-end solutions that accelerate a customer’s time-to-market and moves their products seamlessly from prototype through to volume production”.

He further added “As technology reaches deeper into more products and innovation proliferates through the internet of things, the ability to reach a wider base of engineers earlier in the design process will be critical to our future growth and success.”

We believe that the acquisition will not only increase Avnet’s revenues base but also strengthen the Electronics Marketing division’s offerings.

Furthermore, Avnet expects the transaction to be immediately accretive to its revenues and earnings both. Additionally, once fully integrated, the Premier Farnell business is projected to generate annual synergies of approximately $70 million to $80 million.

Focus on the Electronics Component Business

In the past few months, Avnet has been taking major restructuring steps to streamline its business. It intends to focus on high growth businesses only and divest low profit or loss making businesses. In doing so, the company has already entered into an agreement to sell its troubled Technology Solution business to Tech Data Corporation (TDC - Analyst Report) . The cash-stock deal is valued at $2.6 billion.

The divestment of the Technology Solution division will allow Avnet to focus on high growth areas such as marketing electronic components and related products in the supply chain. The company intends to use its resources to make investments in embedded solutions, IoT and critical digital platforms as well as expand its footprint in newer markets. Avnet anticipates gains in the range of $3.75 to $4.75 per share upon completion of the transaction.

Therefore, we believe that the buyout of Premier Farnell which is specialized in distributing engineering technologies and solutions to the electronic system design community will strategically fit with Avnet’s policy of focusing on high growth electronic component business.

Bottom Line

Acquisitions form an important part of the company’s core strategy to bolster portfolio and expand global operations, while contributing significantly to the revenue stream.

Avnet’s recent acquisitions have been targeted at expanding its international business, with particular focus on Europe, the Middle East and Asia (EMEA). During fiscal 2016, the company completed two acquisitions – Orchestra Service GmbH & ExitCertified, with combined annualized sales of approximately $120 million.

Further, during fiscal 2014, Avnet acquired three companies with combined annualized revenues of approximately $492 million. During fiscal 2013, Avnet acquired 12 companies with combined annualized revenues of approximately $1.18 billion.

Avnet’s strong balance sheet and cash flow provide it with the financial flexibility to undertake strategic initiatives and expand in newer markets. The company’s cash and cash equivalents was $1.03 billion at the end of fiscal 2016.

However, though, the divestment of Technology Solution division will allow Avnet to focus on high growth areas, it will significantly lower its earnings per share. This makes us increasingly cautious about the company’s near-term prospects.

Additionally, although Avnet has acquired over 100 small companies, it will be a challenging task for it to integrate Premier Farnell, its largest ever buyout.

Furthermore, a significant portion of Avnet’s revenues comes from the sale of semiconductors, which is a cyclical industry, characterized by changes in technology and manufacturing capacity and subject to significant market upturns and downturns. Intensifying competition from Arrow Electronics Inc. (ARW - Analyst Report) and Ingram Micro also remains a headwind.

Currently, Avnet carries a Zacks Rank #5 (Strong Sell).

A better-ranked stock worth considering in the broader technology sector is Ambarella Inc. (AMBA - Snapshot Report) , which sports a Zacks Rank #1 (Strong Buy). The stock has witnessed upward estimate revisions in the last 60 days and has a long term EPS growth rate of 14.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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